CAAD 73/2018-T: ISP Tax on Colored Marked Diesel – Additional Assessment for Non-Compliance with GMC Formalities

ARBITRAL DECISION (consult full version in PDF)

I. REPORT

1. On 28-02-2018, A..., Ltd., legal entity no. ..., with registered office at ..., no. ..., ...-... ..., ..., requested the constitution of an arbitral tribunal in tax matters, submitting a request for arbitral pronouncement against the assessment act for Tax on Petroleum Products and Energy (ISP), Road Service Contribution (CSR) and compensatory interest, subject to assessment registration no. 2017/..., of 13-11-2017, of the Customs Delegation of ..., in the total amount of € 30 450,04, relating to sales of 57 860,54 liters, 32 072,53 liters and 373,97 liters of colored and marked diesel (GMC), effected during the years 2015 to 2017, without issuance of the corresponding invoices in the name of the cardholder, supplies to non-cardholders of the beneficiary card/microcircuit and without the corresponding registration being made in the electronic control system, respectively. Petitioning for the annulment of the said act, the Claimant, although it has not made payment of the amount in question, which is being demanded in enforcement proceedings, further requests the recognition of the right to indemnity interest, under article 43 of the General Tax Code, with a view to being reimbursed for the costs incurred with the constitution of a bank guarantee suspending the corresponding enforcement.

2. The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority.

3. In accordance with the terms and for the purposes of the provisions of no. 1, article 6 of RJAT, by decision of the President of the Deontological Council, duly communicated to the parties within the legally applicable periods, the undersigned was designated as arbitrator, who communicated acceptance of the appointment to the Deontological Council and to the Administrative Arbitration Center within the regularly applicable period.

4. Thus, in compliance with the provision of paragraph c) of no. 1 of article 11 of RJAT, as amended by article 228 of Law no. 66-B/2012, of 31/12, the sole arbitral tribunal was constituted on 07-05-2018.

5. As the basis for the claim being formulated, the Claimant alleges, in essence, that there is no legal basis supporting the additional assessment of ISP and CSR relating to the difference in rates applicable to road diesel and colored and marked diesel transactions in cases where the commercialization formalities for the latter product provided for in the Code of Special Consumption Taxes (CIEC) are not complied with.

Referring to cases in which GMC supplies were documented with the issuance of invoices with the designation of "final consumer," that is, without the same containing the identification—name and tax identification number—of the cardholder used in the respective supply, the Claimant expresses the understanding that the issuance of an invoice containing the tax identification of the purchaser constitutes a mere element of control or verification of the conditions for the benefit, whose violation may only constitute an infraction liable to a fine, under the terms of RGIT.

With regard to sales made to non-holders of the mandatory microcircuit card, the Claimant considers that this would have been due to error by a company employee.

Regarding sales not registered in the electronic control system, the Claimant alleges that the quantity indicated as missing results solely from rounding in the records.

Thus, according to the Claimant, the assessment made, to the extent it relates to the situations mentioned, should be subject to annulment by virtue of the Tax and Customs Authority (AT) having incurred an error in interpretation and application of article 93, no. 5, of the Code of Special Consumption Taxes (CIEC).

1. In response to what was requested, the Tax and Customs Authority (AT) pronounced itself in the sense of the inadmissibility of the present request for arbitral pronouncement, maintaining in the legal order the disputed tax act and, in compliance, for the acquittal of the Respondent entity.

2. With the arbitral tribunal regularly constituted, it is materially competent, given the provision of articles 2, no. 1, paragraph a) of RJAT.

3. The parties enjoy legal personality and capacity and have standing (articles 4 and 10, no. 2, of RJAT, and article 1 of Ordinance no. 112-A/2011, of 22/03).

4. There are no nullities and no preliminary questions or exceptions have been raised, therefore nothing prevents the merits from being judged, and the present case is thus in condition for the final decision to be delivered.

5. Given the knowledge that flows from the procedural documents submitted by the parties, which is deemed sufficient for the decision, the Tribunal decided to dispense with the hearing referred to in article 18 of RJAT.

6. No doubts arising regarding the establishment of the facts described in the RIT, on which the disputed assessment is based, which are, moreover, peacefully accepted by the Parties, and considering that exclusively matters of law are in question, the Tribunal decided to dispense with witness testimony.

II. MATTERS OF FACT

1. With relevance for the assessment of the request for arbitral pronouncement, the following factual elements stand out, which, based on the documentary elements attached to the case file, are considered proven:

11.1. The Claimant is a limited liability company, with registered office at ..., ...-... ..., ..., whose business purpose is retail trade in fuel for motor vehicles.

11.2. This activity is carried out through two service stations, one located at the company's head office and another on Avenue ..., in ..., with the latter, operating under a consignment arrangement with B..., not selling GMC.

11.3. Under Service Order no. OI2017..., of the Operational Division of the North of DSAFA, the Claimant was the recipient of an inspection action, commencing on 05-05-2017, in the context of diesel commercialization, specifically colored and marked diesel (GMC), at the service station where the company's head office is located during the years 2014, 2015 and 2016.

11.4. In the course of the aforementioned inspection action, the physical inventory count of GMC stored at the service station was carried out, purchase records were compared with sales records on TPA/POS (automated payment terminal / point of sale), the issued invoices were verified, as well as any improper use of beneficiary cards.

11.5. As a result of the verification carried out, irregularities were detected that imply the constitution of a fact generating a tax obligation, due to non-compliance with the provision in no. 5 of article 93 of CIEC.

11.6. Thus, as stated in section IV.B.2.1 of the RIT, various specific situations were identified for the years 2014, 2015 and 2016 of sales carried out without customer identification, sales to customers not holding a microcircuit card and registrations of quantities lower than those actually supplied, as evidenced in the following tables:

11.6.1. – Sales invoiced without customer identification

[Table content]

11.6.2. Sales invoiced to customers not holding a beneficiary card

[Table content]

11.6.3. Sales made to beneficiary card holders with POS records lower than the quantities supplied

[Table content]

11.7. The inspection services thus found the existence of irregularities relating to the sale of colored and marked diesel, of which, as stated in the above tables contained in the RIT, the following stand out:

a) GMC sales were carried out without issuance of a nominative invoice to the cardholder, using the designation "final consumer," in the quantities determined, in violation of no. 8 of Ordinance no. 361-A/2008, combined with no. 5 of article 93 of CIEC.

b) GMC sales were carried out to various customers who, on the date of the supplies, were not holders of an active microcircuit card, violating the provisions of the aforementioned rules;

c) In the years 2015 to 2017, sales were made to microcircuit cardholders recorded in the POS/TPA by quantities lower than those that were supplied and invoiced, violating the provision of no. 5 of article 93 of CIEC and no. 5 of Ordinance no. 361-A/2008;

11.8. With respect to the quantities of colored and marked diesel supplied to purchasers without the appropriate legal procedures being observed, the value resulting from the difference in taxation applicable to normal road diesel in the context of Tax on Petroleum Products (ISP) and Road Service Contribution (CSR) was considered owing, and responsibility for its payment was attributed to the present Claimant. However, with respect to supplies made during the course of 2014, considering the wording then in force of no. 5 of article 93 of CIEC, it was understood that the infraction would only be susceptible to constituting an infraction punishable by a fine.

11.9. Under the aforementioned conditions, the total amount of € 28 988,93 was determined, corresponding to the tax (ISP and CSR), to which the corresponding compensatory interest in the amount of € 1 462,11 is added, as stated in the following summary table:

[Table content]

11.10. The provision of article 60 of the Supplementary Rules of Tax Inspection Procedure (RCPIT) was duly observed, with the Claimant being notified of the draft conclusions of the Report through office no. DON/.../..., of the Operational Division of the North of DSAFA, of 06-10-2017.

11.11. The Claimant exercised the right to a hearing, alleging, in essence, that:

I – Of GMC sold without invoice in the name of the cardholder

Operator's Position

In essence, the operator:

• alleges that all GCM in question was sold to customers holding a card (e.g. pts. 4,6,9,11)
• acknowledges that indeed in the cases identified in the inspection it issued sales invoices without identifying the purchasing customer (pt. 5, 10)
• alleges that this is due to difficulties in raising awareness among its employees and customers on the matter (pt. 7.12)
• admits that it may be held responsible under infraction proceedings for not having issued an invoice with customer identification, but refuses that payment of the tax in question be imputed to it (pts. 10,11 and13)
• contests the interpretation given by the inspection to the rule provided for in no. 5 of article 93 of CIEC, alleging that it does not follow from this rule that non-compliance with the obligation to invoice in the name of the purchaser has as a consequence the exigibility of the differential tax of GMC for GR (pts. 14 to 29, in particular pts. 16 and 17)

Inspection's Position

The inspection notes:

• that the operator acknowledges that it issued the GMC sales invoices in question without identifying the purchaser, thereby confirming the facts described by the inspection.

• that, contrary to what the operator alleges, it is not demonstrated that the GMC sales in question were made to cardholders, given that, with the identification of the purchaser not appearing in the invoices, it is not possible to confirm whether the existing TPA/POS records correspond to the actual purchasers.

• that the proposed assessment is based on the express provision of no. 5 of article 93 of CIEC (as amended by OE2015), according to which, when GMC sales invoices are not issued with purchaser identification, the differential tax between GMC and GR is exigible from the service station operator.

II. Of GMC sold to non-holder of microcircuit card

Operator's Position

In essence, the operator:

• acknowledges that the GMC in question (32 072,53 liters) was sold to customers not holding a card (pt. 31)
• adds that of the 32 072,53 liters in question, 31 161,72 were sold to companies C... Ltd. and D..., Ltd., alleging that the responsible officer of those companies (who is the same person) deceived its employees (pt.33)
• further alleging that the said responsible officer of companies C.../D... "represented himself as holder of a beneficiary card and requested invoicing to those companies, which the claimant now knows are not cardholders"(pt 34)
• further informing that "since 2015 it has prevented the supply of any fuel to said companies and has already penalized its workers who, if not accomplices, at least were negligent in their functions"

Inspection's Position

The inspection notes:

• that A... acknowledges that it sold the quantities in question of GMC to operators not holding a card.

• that in the year 2014 A... sold 30 171,37 liters of GMC to C... which was not a holder of a beneficiary card. However, in the year in question A... does not present a lack of records in POS terminal in relation to its overall sales. In fact, it sells 64 314,08 liters of GMC, as stated in point IV.B.1 (table 5) of the inspection report.

• that it does not appear from the databases of DGADR that the managers/partners of C... were holders of TPA/POS cards at any time.

III – Of the sale of GMC without registration of such sales in the electronic control system

Operator's Position

In essence, the operator:

• alleges complete ignorance of how this is possible (pt.38 and 42)
• further alleging that this may have happened due to system failure (pt.39.40 and 41).

Inspection's Position

The inspection notes:

• that A... does not present concrete elements to justify the situation

• that the alleged system failures cannot be an acceptable justification for the lack of records, given that DGADR provides contingency procedures for operators to report consumption in those situations."

11.12. With the reasoning above transcribed, the tax inspection concluded that the proposed assessment contained in the draft notified to the Claimant should be maintained in the final report.

11.13. Through office no. DON/.../..., of the Operational Division of the North of DSAFA, the Claimant was notified of the content of the final report and the decision rendered thereon.

11.14. Through Office no. ..., of 14-11-2017, of the Customs Delegation of ...– received on the 15th of the same month – the Claimant was notified of the assessments carried out, as well as the respective 15-day period, counted from receipt of the notification, to make voluntary payment.

11.15. The Claimant did not make voluntary payment within the period stated in the notification, and consequently, on 06-12-2017, the competent enforcement procedure was instituted for coercive collection of the debt.

1. There are no other facts relevant to the merit of the decision that have not been proven.

III. MATTERS OF LAW

1. At issue is the decision, based on the facts summarily described above, regarding the legality of the disputed additional assessments of ISP, CSR and corresponding compensatory interest, with reference to transfers of colored and marked diesel carried out in violation of the commercialization rules for this product, concerning sales without issuance of a nominative invoice to the microcircuit cardholder, that is, concerning sales invoiced to "final consumer," sales made to non-holders of a beneficiary card and sales not recorded in the computer system, to which, in the total assessment of ISP and CSR, plus the corresponding compensatory interest, corresponds a total amount of € 30 450,94.

Claimant's Position

1. Pronouncing itself regarding the assessment relating to sales made without issuance of the corresponding invoice with the tax identification of the respective purchaser, the Claimant understands that, from the analysis of the applicable legal provisions, "it is concluded that none of them, at any time, imposes as a requirement for the application of the exemption the issuance of invoices in the name of the cardholders."

2. In support of such conclusion, the Claimant states: "In reality, from the letter of the law it follows that the constitutive requirements of the benefit here at issue are all those that the law makes depend on the attribution of the microcircuit card." Whereby "The obligation on the part of authorized service stations to register sales in the electronic control system, as well as the obligation to issue invoices with the tax identification of the cardholder, do not constitute material or substantial requirements of the benefit, but rather elements of control or verification of the fulfillment of its requirements"

3. Developing the viewpoint it sustains, the Claimant puts forward the following considerations; "33...the benefit here at issue depends only on an act of recognition by the Directorate-General for Agriculture and Rural Development translated into the issuance of the microcircuit card. 34. That is, through the issuance of that card, the Directorate-General for Agriculture and Rural Development recognizes and certifies that its holder meets the objective and subjective requirements to be able to benefit from the tax relief. 35. The obligation to register sales in TPA/POS terminals and the obligation to issue invoices in the name of cardholders are not constitutive elements of the benefit, serving only the purpose of allowing the control that diesel is indeed (and was) sold to those who have the right to buy it at a reduced rate:"

4. Thus, in the Claimant's view, the assessment carried out, in this aspect, lacks legal support, since it is based on a merely formal requirement – issuance of an invoice without the tax identification of the purchaser appearing therein – and, in the case, no tax is due since these are supplies made to operators who benefit from the rate reduction.

5. On the basis of the reasoning that, in its essential outline, is referred to above, the Claimant concludes that if "there was a failure in the issuance of the invoice – and it assumes this – then it will have to be punished under infraction proceedings as provided for in the General Rules for Tax Infractions."

6. With regard to sales made to non-holders of a microcircuit card, the Claimant merely observes that it never occurred to it that the principal customer was not a beneficiary, while admitting, on the other hand, that other supplies could have been made to beneficiary consumers, but invoiced in the name of third parties not holding the benefit.

7. With respect to sales of GMC not registered in the electronic control system, the Claimant alleges that the difference noted in the RIT should be due solely to rounding or, further, to entries relating to December that would only have been invoiced in January following.

8. Along with the request for a declaration of illegality and annulment of the assessment carried out, with the reasoning summarized above, the Claimant further requests that it be recognized the right to indemnity interest, under article 43 of the General Tax Code, with a view to reimbursing itself for the costs incurred with the constitution of a bank guarantee for suspension of tax enforcement.

Respondent's Position

1. In response to what was alleged by the Claimant, the Respondent states that, as follows from " no. 5 of art. 93 of CIEC, the exigibility of the tax corresponding to the differential taxation between GMC and GR, for transactions carried out from 01/01/2015, in relation to quantities for which the corresponding invoices are not issued in the name of the cardholder."

2. The Respondent emphasizes that, "with regard to these situations, the arguments presented by the Claimant to the effect that there is no place for tax assessment have no validity whatsoever, since '(...) the issuance of an invoice in the name of the cardholder is only a formality ad probationem, as concerns the application of the rate reduction." Because, "...the requirement of issuance of an invoice in the name of the cardholder, introduced by Law no. 82.B/2014 (Budget Law for 2015) in no. 5 of art. 93 of CIEC, does not constitute a formal requirement, but rather, in itself, a cause of liability for payment of the relevant IEC, in relation to quantities for which the corresponding invoices are not issued in the name of the cardholder."

3. Proceeding, the Respondent states that " In fact, the obligation incumbent upon the owner or person responsible for the operation of a fuel service station who carries out the sale to the public of colored and marked diesel, as concerns the issuance of an invoice in the name of the cardholder results directly from the law and no doubts can be raised about it (emphasis added), in Arbitral Decision rendered on 19/03/2018 in Proc. CAAD no. 557/2017-T".

4. Whereby, the Respondent concludes, "In this context, the sale of GMC in 2015, 2016 and 2017 without the invoice that documents the sales operation identifying the purchaser, violates the legal prescription that flows clearly and unequivocally from no. 5, final part, of article 93 of CIEC, in the wording given by the 2015 Budget Law, and, with the consequences clearly specified in the law."

5. With regard to what was alleged regarding sales made to non-holders of a microcircuit card, the Respondent notes the fact that it cannot fail to find it strange that the Claimant alleges ignorance that a customer, C..., Ltd., which in 2014 was responsible for half of its GMC sales (30 072,63 liters out of a total of 64 314,06) did not have a beneficiary card.

6. As to the allegation that what is considered by the Tax Inspection as GMC sales without registration in the computer control system, the Respondent states that the discrepancies noted in the RIT result solely from "rounding" and, possibly, from sales made in December but invoiced in January following, the Respondent notes, merely, that no proof whatsoever is presented of such facts.

7. It thus considers, the Respondent, that, also with respect to these transactions, the objective tax responsibility is verified on the part of the owner or person responsible for the operation of the authorized service stations for sale to the public, in relation to quantities that they sell and that are not duly registered in the electronic control system, provided for in no. 5 of article 93 of CIEC.

8. Concludes, thus, the Respondent, that there is no merit to the Claimant's position, and the disputed assessment should remain in the legal order, whereby the present request for arbitral pronouncement should be judged totally inadmissible.

9. Given the positions expressed by the Parties, above summarized, it is important, from the outset, to note the legislative framework applicable at the time of occurrence of the facts generating the tax obligation, situated, in time, in the years 2015, 2016 and 2017.

On the Tax on Petroleum Products

1. For relevant extra-fiscal reasons, fuels may be subject to transfer at a reduced rate. This is the case of diesel intended to be used in agricultural activities, fishing, railway transport and other uses expressly provided for in article 93 of the Code of Special Consumption Taxes.

2. With a view to ensuring the use of this fuel only for the purposes that justify the attribution of the tax benefit, and to prevent situations of fraud and evasion, diesel supplied to users at a reduced rate of ISP has a specific coloration and fiscal marking.

3. The use of colored and marked diesel is, under the terms of no. 3 of the article referred to above, conditioned to certain economic activities, being restricted to:

• Stationary engines used in irrigation;
• Coastal and inland navigation vessels intended for fishing, aquaculture and dredging;
• Agricultural tractors, combine harvesters, cultivators, motor hoes, motor reapers, self-propelled potato harvesters, pea harvesters, forage harvesters for silage, tomato harvesters, swather-conditioners, wine harvesting machines, trunk vibrators for harvesting olives and other fruits, as well as other equipment, including those used for aquaculture activity, approved by ordinance of the Government members responsible for the areas of finance, agriculture and the sea;
• Passenger and goods transport vehicles by railway;
• Fixed engines;
• Autonomous refrigeration engines, installed in heavy goods transport vehicles for perishable goods, powered by separate fuel tanks, and which have ATP certification (Agreement on the Transport of Perishable Foodstuffs), under the terms to be defined in an ordinance of the Government members responsible for the areas of finance, agriculture and transport.

1. In addition to the coloration and marking and limitations on its use, the commercialization of the product in question is subject to a set of conditions established, not only in that article 93 of CIEC, but also in Ordinance no. 117-A/2008 of 08/02 and, in particular in Ordinance no. 361-A/2008, of 12/05

2. Among the conditions established in Ordinance 361-A/2008, the following stand out, due to their relevance in the situation being analyzed:

" 2. Colored and marked diesel is a conditionally sold product, whose availability in the national market may only be carried out by oil companies that have concluded with the State, represented by the Directorate-General for Agriculture and Rural Development (DGADR), a contract to this effect, in which they undertake to make available the sale to the public of colored and marked diesel, in the proportion of at least one service station for every 600 000 l sold.

1. Colored and marked diesel may only be supplied or sold to holders of properly licensed service stations that are holders of point of sale (POS) terminals.

2. The provision of the preceding number is applicable to distributors, provided they also have POS terminals.

3. Colored and marked diesel may only be sold at service stations to beneficiaries of an exemption or reduction of ISP rate who are holders of microcircuit cards issued for the purpose by DGADR, through which all colored and marked diesel transactions are registered in the computer system managed by the Interbank Services Company (SIBS).

4. The sales referred to in the preceding number are mandatory registered in POS terminals at the moment they occur.

...

1. The registration in the computer system, through POS terminals, of each supply made does not dispense with the issuance of the respective invoice or equivalent document, issued in the name of the holder of the respective microcircuit card.

...

1. On the other hand, and in accordance with no. 5 of article 93 of the Code of Special Consumption Taxes, in the wording in force at the time of occurrence of the facts to which the present case refers, " Colored and marked diesel may only be acquired by holders of the electronic card instituted for the purpose of control of its allocation to the destinations referred to in no. 3, and the owner or legal person responsible for the operation of authorized service stations for sale to the public shall be responsible for payment of the amount of tax resulting from the difference between the level of taxation applicable to road diesel and the rate applicable to colored and marked diesel, in relation to quantities that they sell and that are not duly registered in the electronic control system, as well as in relation to quantities for which the corresponding invoices are not issued in the name of the cardholder.

2. In the situation being analyzed, it is verified that the Claimant, during the years 2015, 2016 and 2017, sold, respectively, 25 642,33, 23 758,64 and 8 459,67 liters of colored and marked diesel to electronic card holders and issued the corresponding invoices but without the same containing the identification of the purchaser, as required by law, instead only referring to "final consumer."

3. This irregularity in the commercialization of the product eliminates the tax benefit provided for in no. 1 of article 93 of the Code of Special Consumption Taxes and determines the application of taxation at the normal level, defining as the passive subject of the tax obligation the owner or legal person responsible for the operation of the service station that supplied the colored and marked diesel in violation of the applicable legal rules (cf. CIEC, articles 93, no. 5 and 4, no. 2, letter h).

4. The obligation incumbent upon the owner or legal person responsible for the operation of a fuel service station who carries out the sale to the public of colored and marked diesel, as concerns the issuance of an invoice in the name of the cardholder results directly from the law and cannot raise any doubts. In the present case, the passive subject did not observe a legal prescription that is clear, which it had the obligation to know and whose consequences are clearly specified in the law.

5. In the same legal norm is typified, with great clarity, the responsibility of the owner or legal person responsible for the operation of fuel service stations with respect to quantities of GMC that they sell and that are not duly registered in the electronic control system as well as those that are made to consumers who are not holders of the beneficiary card.

6. Concluding thus by the legality of the assessment now disputed, the assessment of the request for recognition of the right to indemnity interest is, from the outset, prejudiced.

IV. DECISION

In these terms, and with the grounds set out, the Tribunal decides to judge the request for arbitral pronouncement totally inadmissible.

Case Value: The case value is fixed at € 30 450,94, under the terms of article 97-A, no. 1, letter a) of CPPT, applicable by reference of article 29, no.1, letters a) and b), of RJAT and article 3, no. 2, of the Regulations of Costs in Tax Arbitration Proceedings.

Costs: Under the authority of article 22, no. 4, of RJAT, and in accordance with Table I attached to the Regulations of Costs in Tax Arbitration Proceedings, I fix the amount of costs at € 1 836, 00, to be borne by the Claimant.

Lisbon, 24 November 2018,

The Arbitrator,

Álvaro Caneira